US Trade Gap With Asia to Worsen Unless...

Michael Ivanovitch | President, MSI Global

Sunday, 24 Feb 2013 | 11:42 PM ETCNBC.com

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Martin Barraud | OJO Images | Getty Images

The symbolism was strong but America's trade results were weak as President Barack Obama visited East Asia right after his reelection last November to mark the first anniversary of his shift to a more comprehensive trans-pacific engagement.

Trade, of course, was not the only geostrategic objective of "America's first Pacific President." Yet there was no doubt that the president's diplomats, accompanying him on this trip, were placing U.S. trade interests (i.e., American jobs and incomes) at the top of their Asian agenda. Indeed, they were busy talking about the "strategic power of economic forces," the rising "economics of power" and the "power of economics" in their dealings with the region that represents the fastest-growing segment of the world economy.

All that lofty rhetoric was unfolding against the background of America's seriously worsening trade deficits with Asia-Pacific - an entirely counterintuitive development because the U.S. should have been one of the biggest net beneficiaries of the region's rapidly developing economies.

Sadly, the numbers are showing the opposite. While the overall U.S. trade deficit last year was roughly unchanged from 2011, the trade gap with Asia-Pacific rose 9.4 percent and accounted for more than half of the total. And U.S. exports to the booming East Asia rose only a puny 3 percent during 2012.

Such a result would make sense if the growth of America's domestic demand showed a substantial acceleration in the course of last year. But that was not the case because U.S. gross domestic purchases grew about 2 percent in both 2011 and 2012, which is perfectly consistent with a roughly unchanged total trade gap.

A closer look at the numbers shows that China, Japan and South Korea represented nearly 60 percent of America's trade deficit in 2012. The trade gap with South Korea widened 25 percent, followed by Japan (21 percent) and China (6.6 percent).

Free-Trade Agreements Are Not a Panacea

And things will get worse. As the Fed-driven U.S. economy continues to accelerate, Japanese and South Korean manufacturers will have an increasingly attractive alternative to their weak and shrinking domestic demand. So whatever the other benefits of the "pivot (rebalancing) to Asia" may be, the "power of economics" will not be one of them because the U.S. trade gap with that area will continue to widen.

What can be done about that?

President Obama and his advisers seem to think that the U.S. can achieve a better balanced trade relationship with Asia-Pacific by speeding up the conclusion of the Trans-Pacific Partnership (TPP). That is a regional free-trade agreement, expected to become effective by the end of this year, which will include Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam.

It is unclear, at this point, whether Japan and South Korea will join the discussion.

The chances that Japan may show more interest for TPP have increased somewhat after the Japanese Prime Minister Abe got assurances from Washington this past weekend that Japan would not be required to accept the elimination of all trade tariffs. But it remains to be seen how much this big concession will soften Japan's earlier steadfast refusal to even consider a TPP membership.

South Korea already has a free-trade agreement with the U.S. and, like Japan, seems to find no additional economic advantage in joining the TPP. And why would they. Both countries can sell in the U.S. anything they want under the current trading regime.

China's TPP membership is definitely a very long shot. In spite of what looked like an impromptu U.S. invitation to join the TPP discussions - offered at the margins of the ASEAN meeting in Phnom Penh, Cambodia, last November - Beijing appears to show no interest in this new regional trading group.

This could pose problems for South Korea and Japan, because China is their huge export market and manufacturing hub.

And while all these discussions are going on, the case of South Korea shows that free-trade agreements won't necessarily lead to America's lower trade deficits. Washington and Seoul opened up to each other their markets in March of last year. That allowed Korean firms to expand their U.S. presence, while American exports to South Korea (in 2012) contracted by nearly 3 percent. The net result was a 25 percent increase in South Korean trade surplus with the U.S.

Clearly, more than a free-trade agreement is needed to level the playing field for American firms operating abroad. Not only should there be a vigilant implementation of agreements' arbitration mechanisms, and a full respect of the rules of the World Trade Organization (WTO), but there should also be a close monitoring of reciprocal fair trading practices.

"If You Don't Buy, You Won't Sell"

This reminds me of the picture of Bill Clinton hosting Japan's Prime Minister Morihiro Hosokawa in Seattle, WA, in September 1993. One sees there the two young leaders, holding a glass of beer in their hands and sporting leather jackets, with Clinton pointing his trademark index finger at Mr. Hosokawa and, reportedly, telling him "if you don't buy, you won't sell" – a folksy and robust statement that pretty much sums up the concern for fair trading reciprocity.

Ensuring a fair market access to American companies selling and investing in Japan, and in most East Asian countries, is an enduring challenge. Last year, Japanese firms expanded their export market share in the U.S. by 14 percent, and their automobile manufacturers now control nearly one-third of the U.S. car market. But things are very different in Japan. Last year, all foreign car sales in Japan are estimated to have accounted for less than 4 percent of the total.

Or, on a more mundane level, an iconic six pack (a popular package of six beer cans in the U.S.) I buy at my mid-town Manhattan supermarket for $6.99 is roughly the price of a 12oz bottle of American beer sold in similar outlets in Japan and in some other East Asian countries where I occasionally did my informal economic field studies disguised as grocery shopping.

And there is more: Pssst...want a AAA copy of sunglasses by a famous American designer? That was an offer I received on a recent stroll in the neighborhood of an upscale East Asian shopping mall, where you can also have a AAA copy of Starbucks latte for one third of the price of the original. A huge computer software and hardware bazaar offers, just to cite one example, the latest copy of the Britannica for about $10.

During his short-lived testing of presidential chances last year, Donald Trump, whose buildings grace Manhattan's skyline, used to scream: "They are eating our lunch …" But there is no need to reach for New York's emphatic vernacular to correct such blatant violations of international trade. And neither would that require sweeping regional free-trade agreements, where a genuine opening up of U.S. markets is offered in exchange for uncertain – and unenforceable - trade advantages for American businesses.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.